One Lump or Two?
Wall Street analysts have their own language. They say things like “Can you give some more granularity on that?” when they’re asking a CEO for more details on a topic, or they might ask for more “color” on the quarter.
One of my favorite terms is “lumpy.” It means inconsistent. A company’s profits might be described as lumpy if one quarter has earnings of $1 per share, the next has only $0.20 in earnings, and the following quarter EPS is $1.05. Sometimes that’s due to a sales cycle or simply when a big contract gets signed/paid/recognized.
I’ve extended “lumpiness” to dividend payments as well. Foreign stocks often have lumpy dividends. They might pay $1.65 per share in year 1, $1.32 in year 2, $1.77 in year 3 and $1.41 in year 4.
American companies typically try not to have the dividend flying all over the place like that. They do their best to keep the dividend consistent. If management is concerned that it might have to cut the dividend in the future, chances are it won’t raise the dividend the year before, so that the change doesn’t appear to be a reduction in the dividend.
When it comes to companies located overseas, particularly in emerging markets, the dividends can vary widely from year to year. Currency fluctuation can play a big part in that. In the local currency, a company may pay a consistent dividend. But if that currency moves 10% per year against the dollar, an investor in the American depositary receipt (ADR) may get $2 per share in dividends one year and $1.80 the next year, all while the company actually shelled out the same amount in its local currency.
American depositary receipt (ADR): An instrument that trades on a U.S. exchange that represents shares (often one share) of a foreign stock. The ADR is denominated in U.S. dollars while the actual foreign stock is priced in the currency of the exchange where it trades. An owner of an ADR has the right to convert the ADR into shares of the foreign stock, although few people actually do.
For example, Chilean bank Corpbanca SA (NYSE: BCA) paid out dividends of Ch$51 billion in 2008, Ch$56 billion in 2009, and Ch$85 billion in 2010 (Ch$ = Chilean peso). An investor in Chile would have received Ch$0.22 per share in 2008, Ch$0.25 in 2009, and Ch$0.37 in 2010.
However, because the peso appreciated in 2009 from where it was for most of 2008, U.S. investors actually saw their dividend decline to $0.49 per ADR from $0.61. In 2010, when the peso fell, U.S. holders of the ADR received $0.86.
As you can see in Table 11.1, in 2009, Corpbanca actually paid more in total dividends and more per share in dividends, yet investors in the ADR received less per unit because of the currency appreciation.
Table 11.1 Corpbanca Dividend History
Source: Corpbanca Dividend History
This is an important concept to understand because it impacts your dividends. Let’s make up an example that will be easy to grasp.
The only currency accepted in Marc Lichtenfeld’s Authentic Italian Trattoria is the Lichtenfeldian dollar (L$). At the time I go public and sell stock, it is trading at parity with the U.S. dollar: L$1 = $1. The stock is also denominated in Lichtenfeldian dollars.
Let’s assume that one ADR represents one share of stock.
I declare a dividend of L$1 per share. Because the Lichtenfeldian dollar (also known as the Lichty) is trading at a 1:1 ratio with the U.S. dollar, ADR holders will receive $1 per share.
The following year, due to the success of my baked ziti, the Lichtenfeldian dollar appreciates to $2 for every L$1.
I continue to pay L$1 per share in dividends. However, because the Lichty is now worth two U.S. dollars, ADR holders will receive $2.
In year 3, after a food reviewer gets a nasty case of the heaves following a bad batch of clams casino, the Lichty plummets to $0.50 for every L$1. I continue to pay a dividend of L$1 per share, but now that equals $0.50.
So over the course of three years, I paid out L$1 per share in each year yet the holders of the ADR saw their distribution fluctuate between $2 and $0.50 because of the currency swings.